Amid chaos, banking basics pay off for Wells Fargo

SAN FRANCISCO -- With its iconic stagecoach, Wells Fargo has evoked images of the wild West throughout its 156-year history.

Now it's finally expanding east of the Mississippi with a $12.2 billion acquisition of Wachovia, a golden opportunity that the San Francisco-based bank was able to seize largely because it never got too wild while many of its rivals gambled on exotic lending products that led to the current financial chaos.

"Wells Fargo knows how to gather deposits, sell additional products and not make loans to people who can't afford to pay them back," said Celent analyst Bart Narter.

It sounds simple, but sticking to the banking basics wasn't standard operating procedure while home prices were soaring in a four-year stretch that ended in 2006. The real estate boom emboldened lenders to lower their standards and offer mortgages that began with abnormally low interest rates before shifting upward to saddle borrowers with monthly payments they couldn't afford.

Although Wells Fargo consistently ranked among the largest U.S. mortgage lenders during this frothy period, the bank mostly avoided the crazy stuff that ultimately destroyed Countrywide Financial, Washington Mutual, Wachovia and a long list of other lenders.

The aversion to risky loans was instilled by Wells Fargo's leader for the past decade, Richard Kovacevich, who handed the chief executive reins over to John Stumpf last year. Kovacevich remains Wells Fargo's chairman and is now planning to postpone his retirement plans to help complete the Wachovia combination.

Wells Fargo's lending discipline is even more impressive, given its prominence in California -- an epicenter of the real estate boom and bust.

Not that Wells Fargo has remained completely pristine. The bank already has taken a $1.4 billion loss on ill-advised home equity loans and also delved into the dicey subprime market through an arm that caters to consumers with shabby credit records.

Wells Fargo still hasn't posted a quarterly loss during this the past year of upheaval, though its profits have been shrinking during the past nine months.

"They aren't perfect, but they have done enough things right where they look they are going to be among the chosen ones in this period of banking consolidation," said analyst Frederick Cannon of Keefe, Bruyette & Woods.

Once the Wachovia deal is complete, Wells Fargo will join Bank of America and JPMorgan Chase as the U.S. banks with the country's biggest branch networks "and in many ways, Wells Fargo may be the strongest of them all," Cannon said.

Investors also appear to have high hopes. Wells Fargo's shares gained $1.06 or 3.9 percent to close at $28.31 Friday.

By combining with Wachovia, Wells Fargo will have total deposits of $787 billion and more than 10,500 locations -- more than any of its rivals.

Even with Wachovia, Wells Fargo still wouldn't be the biggest U.S. bank in terms of assets. After the deal, Wells Fargo will have $1.42 trillion in assets -- trailing Bank of America at $2.72 trillion (including its acquisition of Merrill Lynch); Citigroup at $2.1 trillion; JPMorgan at $1.78 trillion (including its acquisition of Washington Mutual).

Wachovia's extensive branch network, particularly in Northeastern and Southeastern states where Wells Fargo hasn't previously operated, made it a risk worth taking, analysts said.

"It's like the yin and yang of super-regional banks are getting together," Narter said.